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Moody’s downgrade gives edge to safe-haven banks

(Reuters) – Major ratings downgrades by Moody’s will further divide the world’s biggest banks based on their strength and access to cheap customer deposits. The ratings, released Thursday by Moody’s Investors Service, gave a competitive advantage to “safe-haven” banks that fund themselves with stable, low-cost customer deposits, while worsening the outlook for weaker banks that …

(Reuters) – Major ratings downgrades by Moody’s will further divide the world’s biggest banks based on their strength and access to cheap customer deposits. The ratings, released Thursday by Moody’s Investors Service, gave a competitive advantage to “safe-haven” banks that fund themselves with stable, low-cost customer deposits, while worsening the outlook for weaker banks that rely more on capital markets for their funding.

Stock and credit markets reacted mildly after Moody’s cut the ratings of 15 of the world’s biggest banks, as the cuts had been widely anticipated. The cost of insuring against default for each of the five biggest U.S. investment banks fell on relief that Moody’s was not harsher, said Otis Casey, research director at Markit in New York. The KBW index of U.S. bank stocks rose 1.4 percent on Friday in New York. European bank shares rose 0.1 percent. Shares of New York-based Morgan Stanley were up 1.3 percent after initially jumping more than 3 percent in reaction to its rating having been cut less than feared.

Aside from the immediate market moves, the downgrades reinforce a trend that has seen weaker banks punished for their risk-taking, while stronger banks are rewarded for conservative funding models, ensuring lower costs and higher margins. Not only will funding costs rise for the worst-rated banks, but trading partners are bound to ask for more collateral – and steer business to those perceived to be financially stronger. “These downgrades will increase the cost of doing business for banks, either through reduced, or more costly, access to funding or the need to lodge extra collateral with creditors,” said Daiwa Capital Markets analyst Michael Symonds Moody’s gave the highest ratings to HSBC, Royal Bank of Canada and JPMorgan, which it said had stronger “shock absorbers” than their peers. All three are regarded as safe-haven banks, funded by deposits from millions of retail customers and relying less than riskier banks on capital markets for short-term financing.

Moody’s gave the lowest credit ratings to banks that have been affected by problems with their risk management or whose capital buffers are not as strong as those of their rivals. Those include Morgan Stanley and others with few retail deposits, as well as banks such as Bank of America, Citigroup and Royal Bank of Scotland, which despite having big deposit bases have gotten into trouble by combining their retail business with riskier investment banking. Moody’s placed Barclays, BNP Paribas, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Societe Generale and UBS in a middle group of banks, which it said include firms that rely on unpredictable capital markets revenues to meet shareholder expectations.

For banks that rely heavily on markets for funding, the lower ratings make difficult conditions even worse at a time when they are suffering because of the euro zone crisis and a global slowdown in growth. “Markets tend to discriminate more between issuers at lower ratings – in terms of funding costs – particularly during times of stress,” said analysts from Citigroup. The downgrades reflected a view in capital markets that was “something more structural and fundamental rather than what is just cyclical noise”, Johannes Wassenberg, Moody’s managing director of European banks, told Reuters. “We tried to assess risk from capital markets… and the shock absorbers banks have,” Wassenberg said.